On January 1, 2008, Dryft granted 1,000 employee share options that vest after a four-year service...

On January 1, 2008, Dryft granted 1,000 employee share options that vest after a four-year service period, with an exercise price of $30 per share. Using the Black-Scholes pricing model, it was determined that the grant-date-fair-value-based measure of each option was $15. On the grant date, Dryft’s stock was trading at $30 per share.

On January 1, 2010, Dryft decided to change the terms of the incentives for the third and fourth years of service of the 2008 annual grant by modifying the exercise price to $20 per share. Using the Black-Scholes pricing model, management determined that the fair-value-based measure of the awards as of January 1, 2010 was $9 before the terms of the award were modified and $12 immediately after modification. The modification did not affect any of the other terms or conditions of the awards. (No forfeitures are assumed)

a- How much compensation cost should Dryft recognize in each year of the award’s service period?

b- How would the accounting for the awards change if the modification to the terms of the award was made on January 1, 2014, after the awards have become fully vested?

Please show detailed answers, use journal entries and explain.

Solutions

Expert Solution

Answer :

a)How much compensation cost should Dryft recognize in each year of the award’s service period?

1000 employees share options after 4 years :

Fair value of each option = $ 15

Years	Explanation	Expenses for the period	cumulative expenses
2008	1000 * 15 * (1/4)	$ 3,750	$ 3,750
2009	1000 * 15 * (1/4) - 3750	$ 3,750	$ 7,500
2010	1000 * 15 * (1/4) - 7500	$ 3,750	$ 11,250
2012	1000 * 15 * (1/4) - 11250	$ 3,750	$ 15,000

b)How would the accounting for the awards change if the modification to the terms of the award was made on January 1, 2014, after the awards have become fully vested?

A change in wording subsequently majorly affects revealed profit.The element will perceive in full.

1)The costs identified with the first offer based installment contract and

2)The costs identified with the alteration of the agreement.

On the off chance that alteration results in reduction in reasonable esteem, at that point everything of the first contract is expensed to benefit or misfortune.

In synopsis :

1)An expansion in the reasonable esteem builds the complete costs an

2)A decrease of reasonable esteem does not change the all out costs.

For this situation the reasonable incentive after adjustment got decrease. So there is no effect on costs.

ekkarill92 answered 2 hours ago

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